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A Fast and Furious Race to the Bottom Line

SAN FRANCISCO — After putting an optimistic spin on his final state of the state address Wednesday, California Gov. Arnold Schwarzenegger will address the grim specifics of the state’s budget today, unveiling his formal proposal to close a general fund gap pegged at almost $20 billion over the next 18 months.

The Republican governor talked briefly about the budget Wednesday, foreshadowing the “bitter” budget cuts he said he would have to propose today.

It’s a case of déjà vu all over again for California politicians who went through the budget-balancing drill twice in the past year to close — at least on paper — a $60 billion general fund budget gap.

Putting California’s budget together is difficult during the best of times, because it must be passed with two-thirds majorities in each chamber of the Legislature, giving minority Republicans leverage in the process.

The two tortured budget negotiations of 2009 yielded tens of billions of dollars in budget reductions, as well as temporary sales tax and income tax increases that led Republican backbenchers to depose the leaders who helped negotiate them.

While lawmakers dithered, the state’s liquidity became so strained that the ­controller’s office was forced to issue

$2 billion in IOUs to lower-ranked classes of creditors to protect cash flows to those with legal protections, such as ­bondholders.

But last year’s budget actions didn’t solve the whole problem. Largely because of policies that didn’t pan out in reality the way they were penciled out on paper, the state is off by more than $6 billion for the current fiscal year on expected revenue of $88 billion, according to estimates by the Legislative Analyst’s Office. And without policy changes, spending is on a pace to exceed revenue by more than $13 billion for fiscal 2011.

That means lawmakers are going to be fighting over cuts they weren’t willing to accept last year.

The governor mostly sidestepped those issues Wednesday, sticking to his trademark optimism about California and proposing several reform measures, most of which would not have any effect until after he leaves office at the end of the year.

The only specific proposals he offered for this year would actually increase the budget deficit. They include a tax-credit for home buyers that would cost $200 million, as well as a $500 million job-training program Schwarzenegger said could be funded by borrowing from the Unemployment Compensation Disability Fund.

While the tone of most lawmakers’ reactions mirrored the governor’s optimism over the ability to find common ground, the specific details they offered indicate how difficult it will be to find compromise on the budget.

In a joint press conference, Democratic leaders from both houses voiced skepticism about the governor’s expected spending plan — even his promise to protect both K-12 and higher education from cuts.

“We don’t support the idea that there’s a firewall around education and we’re going to eliminate everything else,” said Assembly Speaker Karen Bass, D-Los Angeles. “If that would be the trade-off, I would not support that.”

“We look forward to working with the governor but we are also going to fight in the right way for people, for families, and for beginning to set a direction in California that restores much of what has been lost,” said Assembly president pro tempore Darrell Steinberg, D-Sacramento. “We need to begin setting the stage now for doing no more harm.”

The state’s budget woes have not helped its bond issuance efforts. Despite a backlog of approved projects, California was at one point out of the bond market for nine months as lawmakers negotiated budget issues.

California’s ratings are the lowest of any state — BBB from Fitch Ratings, Baa1 from Moody’s Investors Service, and A from Standard & Poor’s.

Treasurer Bill Lockyer’s office projects that California will issue more than $13 billion of general obligation bonds during the current fiscal year, ending June 30, of which about $6.3 billion has been issued.

The market for California GO debt has been relatively calm in recent weeks, according to Matt Fabian, managing director and senior analyst for Municipal Market Advisors.

“Long 5% bonds are at about 5.50 to 5.55. That’s about 10 basis points better than they were in the middle of last month,” he said. “They’ve been in a range over the last year, 5% to 6.20%, so they’re maybe somewhere around the middle of the range.”

On Wednesday, Schwarzenegger also signaled that he expects federal help to help balance the budget, something he framed as simply helping make up for California’s long history as a donor state that pays more in taxes to Washington than it ever gets back.

“We are not looking for a federal bailout, just federal fairness,” Schwarzenegger said Wednesday.

That’s one idea likely to find bipartisan support from state lawmakers, though it may be less likely to yield results.

“They have their own problems,” Sen. Denise Ducheny, D-San Diego, said of the federal government. “But they can print money, so that’s how that works.”

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